What is Bitcoin?
Bitcoin is a peer-to-peer electronic cash system. Peer-to-peer means, that no central authority issues new money or tracks transactions. Instead, these tasks are managed collectively by the community network. Bitcoin are the unit of account of the system. Simply put, Bitcoin is cash made out of digital coins. There are such things as physical bitcoins, but ultimately, a bitcoin is just a number associated with a Bitcoin address. A physical bitcoin is simply an object, such as a coin, with the number carefully embedded inside.
Who created Bitcoin?
In 2008, the year of the beginning of the financial crisis, Satoshi Nakamoto (probably a pseudonym) published a paper explaining a new technology enabling the transfer of value from computer A to computer B in a safe and irreversible way. Early 2009 he distributed the first software for a digital currency easy to transfer all over the web.
Who prints Bitcoin?
Nobody prints bitcoin. Bitcoin is a digital currency that has to be mined by powerful computers by means of complex algorithms. In this way, Bitcoin is independent from any central bank. And this is the reason why it is said that Bitcoin is backed by mathematics.
Why should I use Bitcoin?
Empowering your financial freedom - Bitcoin is all yours, you don't need approval of any kind to use it or keep it. You don't even need a bank account, just a smart phone or a computer. You can send your bitcoin wherever you want without asking for any kind of permission. Bitcoin transactions have a high level of privacy because all you need to know for a Bitcoin transaction is the wallet address you want to send bitcoin to. If this is not advantageous enough for you, just keep reading...
Investment – Some people find investing in Bitcoin a good idea. As a matter of fact, Bitcoin overall has been the world’s best performing asset class since its inception back in 2008-09. Moreover, the total number of bitcoins that can be mined is fixed. This means no inflationary risk for the value of your bitcoin. However, the Bitcoin market is a true open market and the value of Bitcoin is determined by supply and demand, just like the value of any other good traded on exchanges it could suddenly drop or rise.
Fast and cheap transactions all over the world – If you own a web shop it could be a good idea to accept bitcoins as a payment method. In this way you can reach a much larger number of users, because everyone on the Internet can easily pay you in bitcoin. The people who are not able to get a credit card will be able to pay at your shop. Also, you can accept bitcoin if you are a “brick and mortar” shop. In this way you offer an alternative way of paying that can be used by everyone with a phone in his pocket. Many shops preceded you and some cities are even famous for the many retailers accepting bitcoins.
Help create a better world – Using Bitcoin contributes to a better world. Many people around the world don't have access to traditional financial infrastructures. People in rural areas of developing countries simply don't have a bank where they live. But even in rich countries the lack of credit history for example, can make it difficult for someone to receive financial support. The access to Bitcoin infrastructure is very simple: just an internet connection. In this way crowd funding projects are easily supported and microcredit can target directly individuals in need.
Is it safe to use Bitcoin?
Bitcoin transactions respect your privacy. You don't need to send your personal information all over the web like with credit cards. That makes identity theft much more difficult and Bitcoin transactions much safer. However, Bitcoin transactions are irreversible. So make sure to send your bitcoin to the right Bitcoin address.
Who owns Bitcoin?
You are the only owner of your bitcoin. This ownership is published and settled in the blockchain. The blockchain is a distributed public ledger on the internet, which keeps all the Bitcoin transactions listed. In this way double spending is prevented and you don't need a third party (for example a bank) to qualify your transactions as valid. With Bitcoin you are your own bank.
I really want to use Bitcoin, but is it legal?
Yes, it is, at least in most countries. But they are not a so called legal tender. That means that you cannot pay your taxes with Bitcoin, and you still have to change them in to a legal tender, like for example your national currency, to do so (same as for gold).
Start using Bitcoin and empower your financial freedom!
What is a Bitcoin Wallet?
To start using bitcoins, you need to install a Bitcoin 'wallet' on your computer or mobile device. The wallet software manages your Bitcoin addresses where you can receive or send bitcoins to other Bitcoin addresses. Usually, the Bitcoin addresses are kept in a file on the hard disk of your computer (from there you can make a backup of your Bitcoin wallet). Beware that if you lose this file you will also have lost your bitcoins. We recommend to contact your Bitcoin wallet supplier for any specific questions about your wallet.
What is a Bitcoin address?
A Bitcoin address is the public address of your Bitcoin wallet. To obtain this public address, you must create an electronic wallet (Wallet) which will contain two addresses: a private address and a public address.
Is it “Bitcoin” or “bitcoin”?
Since Bitcoin is both a virtual currency and a protocol, capitalization can be confusing. Accepted practice is to use Bitcoin (singular with an upper case letter B) to label the protocol, technology, and community, and bitcoins (with a lower case b) to label units of the crypto coin.
Is it “XBT” or “BTC”?
The commonly used shorthand is “XBT” or "BTC" to refer to a price or amount (e.g.: “100 XBT”). Until fairly recently, bitcoin units were abbreviated as “BTC” or “mBTC” (millibitcoin) in everyday language. “XBT” became popular, when Bloomberg started to use this ticker symbol for Bitcoin. “XBT” adjusts to the ISO 4217 currency code standard. Currency codes are composed of a country's two-character country code, plus a third character denoting the currency unit. For example, the Swiss Franc (CHF) is made up of Switzerland’s country code (CH = Confoederatio Helvetica) and a currency designator ("F = franc"). In the event that a currency is not sponsored by a governmental organization (like Bitcoin), it is preceded with an "X". If Bitcoin is ever to be added to the ISO 4217 currency code list, it is the belief of many that this will happen as “XBT”. To facilitate this transition, Bloomberg, as well as leading members of the Bitcoin community, refer to Bitcoin as “XBT”.
Do I have to transact with a whole bitcoin?
You don’t need buy or transact a whole bitcoin. Bitcoin has 8 decimal digits and can be broken down to 0.00000001 XBT, which is called a Satoshi.
How does Bitcoin work?
Bitcoin uses public-key cryptography, peer-to-peer file-sharing technology and proof-of-work to process & verify payments. Bitcoins are sent (or signed over) from one address to another, with each user potentially having many addresses. Each payment transaction is broadcasted to the network and included in the block chain ledger, so that the bitcoins cannot be spent twice. After a few minutes, each transaction is locked in time by the massive amount of processing power that continues to extend the block chain. Using these techniques, Bitcoin provides a fast and extremely reliable payment network, which anyone can use.
What is a cryptographic payment and why should I use it?
Cryptographic means of payment refer to peer-to-peer electronic cash transactions, whereby digital coins function as a medium of exchange and can be instantly transferred between any two computers in the world. Compared to traditional payment systems, digital money (e.g. Bitcoin) enables users to transfer digital assets directly over the web within a few minutes, rather than exchanging electronic messages between banks, followed by the movement of funds through debiting and crediting several accounts at each institution and at intermediary banks, which results in transfer times of a few days. There are significantly lower processing fees for transferring digital cash, compared to wire transfer or card payments via VISA, MasterCard or PayPal. The first cryptocurrency to begin trading was Bitcoin in 2009. Since then, numerous cryptocurrencies have been created. Paying with cryptocurrency is similar to electronic cash. It can be used to pay friends and/or merchants.
What is "virtual currency"?
There are a large number of virtual currency schemes that have been created and which function in different ways. The European Central Bank (ECB) divides them up into three categories:
- Closed virtual currency schemes: These are usually intended for buying virtual goods and services within the actual virtual community and the user obtains the currency through some form of activity. Some of these are earned and used in certain online games, such as World-of-Warcraft Gold. Closed virtual currency schemes are linked to the real economy and common examples are the bonus systems that airlines (air miles) or some credit cards offer.
- Virtual currency schemes with unidirectional flow: The virtual currency is bought for real money, but cannot be converted back. The exchange rate is determined by the system owner. One example are Amazon Coins, which Kindle-users can purchase with real money and then use to purchase applications and other Kindle-services. Another example are the now discontinued Facebook Credits, which could be used to buy virtual goods and services within Facebook.
- Virtual currency schemes with bidirectional flows: In these schemes, one can use money to buy the virtual currency and also convert it back into money at special exchange websites. There may be both market-based exchange rates and predetermined, fixed exchange rates. Examples of currency schemes with bidirectional flows include Bitcoin, Ripple and Linden Dollar.
Is Bitcoin a "virtual currency"?
Bitcoin is referred to as a “virtual currency” or “cryptocurrency” in common parlance. In fact, it is a complementary currency, but not legal tender. Among other things, Bitcoin is a medium of exchange, a store of value and a unit of account, which can be used as a means of payment. Crypto coins are electronically created assets, allowing credit entries to be made directly between payer and payee with instant settlement and without counterparty risk, existing through clearing houses, which stands in contrast to traditional clearing and settlement mechanisms used by debt-based payment networks (e.g. card payments, interbank transfers).
What is the Internet of Money?
Bitcoin technology provides connectivity to banks and financial inclusion to non-banks on a global basis. Technically speaking, you can be your own bank. This disruptive technology puts money into the hands of people, rather than limiting the control on cash flow and fund transfer to financial institutions. The pioneering innovation consists of clearing and settlement being done at the same time through consensus-based file-sharing on the so-called blockchain, located in the Cloud. The Bitcoin protocol that enables assets and payments to enter the decentralized computer network through secure cryptographic procedures, is considered to be the Internet of Money.
Are bitcoin, digital cash and digital money one and the same thing?
Virtual currency is a digital representation of an asset. Cryptographic coins that are denominated in Bitcoin or any other crypto unit represent “digital cash” respectively “digital money”, also called “cryptocurrency”. Simply put, digital money is an electronic form of cash, in addition to paper banknotes and metal coins.
Why do I have to wait 10 minutes?
Compared to wire transfers that can take days to clear, transmitting payments with Bitcoin is almost instant. Nevertheless, it can take up to 10 minutes before the network begins to confirm your transaction by including it in the blockchain ledger. A confirmation means that a consensus on the network is performed, verifying that the bitcoins which you have received haven't been sent to anyone else. This is to protect you against the so-called "double-spending problem" or "Two General's Problem". As soon as the bitcoins are considered your property, you can spend the bitcoins which you have received. Once your transaction has been included in one block, it will continue to be buried under every block after it, which exponentially consolidates this consensus and eliminates any risk of a reversed transaction. Every user is free to determine at what point a transaction is considered confirmed. But 6 confirmations are normally considered to be as safe as waiting 6 months for a credit card transaction.
How long does it take to “wire” bitcoins?
Sending bitcoins is similar to wiring money, with the exception that digital cash travels much faster over the wires than other types of transactions. After a transaction is broadcast to the network, it may be included in a block that is published on the block chain. When that happens, it means that one confirmation has occurred for the transaction. With each subsequent block that is found, the number of confirmations is increased by one. To protect against double-spending, a transaction should not be considered as confirmed until a certain number of blocks verify that transaction. The classic Bitcoin client will show a transaction as "unconfirmed" until 6 blocks verify the transaction. On average, each block takes 10 minutes to be generated, resulting in a one-hour waiting period for a transaction to be considered “confirmed.” Merchants who accept bitcoins as payment, can set their own threshold of how many confirmations are required until funds are considered valid. When potential losses due to double-spending are nominal, as with very inexpensive or non-fungible items, payments are considered confirmed as soon as they are seen on the network. Most merchants who bear risk from double-spending require 6 or more blocks to confirm a transaction.
Why bitcoin when card transactions take a fraction of a second?
Admittedly, credit card transactions clear faster than Bitcoin transactions, but that's only half the story. Even though card payments clear in a fraction of a second, the actual settlement process behind the payment authorization takes a few days and carries the risk of chargebacks and fraud for a long period of time. In fact, the underlying settlement process involves bookings between the payer's bank and the merchant's bank. These are accomplished through clearinghouses and are costly in terms of time. Having said this, credit card payments are actually not the right equivalent to digital cash. Bitcoin is more comparable to a wire transfer since both system’s settlements are final, hence they cannot be reversed.
Why can't I wire bitcoin through my bank?
You can't send bitcoin through your bank, because there are only a few banks in the world utilizing the Bitcoin-like technology today. Fidor Bank in Germany is one of them. Essentially, Bitcoin is a paradigm shift. Ultimately, the Bitcoin protocol lets anyone act like a bank - at least from a technical perspective. The exceptional feature of Bitcoin is its ability to store and transfer value digitally, thus functioning as a medium of exchange which shortens the clearing and settlement mechanism into one single action. This combines both processes into a fully integrated operation without requiring further intermediaries. This is very different from conventional payment systems used by banks today. When money travels, banks use financial messaging services to clear funds digitally, whereby the subsequent settlement process is totally separated and tied to a wide array of arrangements with financial intermediaries, including the physical movement of funds.
Why do bank wires take much longer than sending bitcoin?
Wire transfers with commercial banks take a few days because today’s payments systems are very fragmented. That is one of the reasons why Bitcoin technology can make a big difference in the world. Digital money offers a fast and low-cost way to transfer money globally, providing access to efficient financial systems to anyone on this planet, not only to the wealthy. While investment banks transacting in financial markets move billions at the touch of a button, real-economy payments are still lagging behind. It is critical to understand the given process in a conventional money transfer in order to recognize the cause of the delay. In electronic funds transfers, payments get credited from one bank account to another bank account through financial messaging services and counter-entries that subsequently require the actual movement of funds. To do so, banks maintain accounts with each other at bank-operated clearinghouses and state-owned central banks, which in turn, maintain accounts at the Bank for International Settlements (BIS) in Basel, Switzerland, making this international organization the bank of central banks.
So why can't banks make regular transfers faster than Bitcoin?
Ideally, payments should travel as fast as emails. That's the theory, but the practice is different. Day-to-day financial institutions around the world perform gross and net settlement procedures on a domestic and international level, using clearinghouses like EBA in Europe, SIC in Switzerland, NACHA in the USA, ECS in India, CNAPS in China, etc. Cross-border payments are processed through specialized interbank networks like SWIFT. In addition, card payments and ATM transactions run on the rails of private networks, like VISA or MasterCard, which in turn are connected with most financial institutions. Through net settlements, banks essentially pay the open balance between the accounts maintained at jointly operated clearing houses or at central banks, thereby limiting the need of physical cash transport. This elaborate system requires intermediary banks trusting each other, whereby messaging services, clearinghouses and central banks ensure connectivity, liquidity and scheme integrity. At the end of the day, bank transfers are complex and time-consuming, especially when completing cross-border transactions.
What is the difference between clearing and settlement in payments?
Understanding the difference between clearing and settlement is vital to comprehend how payment systems work today and why Bitcoin is a disruptive technology. In finance, clearing is a commitment made for a transaction, until it is settled. The clearing of payments is necessary to turn the promise of payment (e.g. a check, a card authorization or electronic fund request) into actual movement of funds from one bank to another. The settlement is the corresponding exchange of money or store of value (financial instruments like securities). Fundamentally, transactions utilizing the age-old banking system based on the conventional clearing and settlement mechanism - be it card payments or wire transfers - cannot be considered complete without eventually establishing trust between financial institutions, and cannot be marked as settled without the mutual updating of accounts at intermediary banks. The Bitcoin protocol, however, stores value and as such acts as a sealable medium of exchange, enabling payments through the blockchain ledger and providing public consent as a third-party method of establishing trust between the transacting parties.
Why does digital money make a difference in the world?
The majority of the world's population is either under-banked or unbanked. 2.5 billion Adults have no access to formal financial services. This situation is often linked to poverty. Billions of people are disadvantaged economically, socially and politically. We at Payment21® believe that everyone has the right to save, invest or transfer funds securely and at an affordable cost. Digital money (e.g. Bitcoin) can be a driving force of financial inclusion and economic empowerment. Inclusive growth generates economic growth, the benefits of which are widely shared.
What are the advantages of Bitcoin?
- Payment freedom: It is possible to send and receive any amount of money instantly anywhere in the world, at any time. No bank holidays. No borders. No imposed limits. Bitcoin allows its users to be in full control of their money and enjoy payment freedom.
- Very low fees: Bitcoin payments are currently processed with either no fees or extremely small fees. Users may include fees with transactions to receive priority processing, which results in faster a confirmation of transactions by the network. Additionally, Payment21® assists merchants in converting Bitcoin transactions to fiat and depositing funds directly into their bank account in their desired currency. As our processing services are based on the Bitcoin protocol, they can be offered for much lower fees than credit card transactions or bank transfers.
- Fewer risks for merchants: Bitcoin transactions are secure, irreversible and do not contain the customer’s sensitive or personal information. This protects merchants from losses caused by deception or fraudulent chargebacks. Merchants can easily expand to new markets, where either credit cards are not available or fraud rates are unacceptably high. The net results are lower fees, global markets and lower administrative costs.
- Security and control: Bitcoin users are in full control of their transactions; It is impossible for merchants to force unwanted or unnoticed charges as it could happen with other payment methods. Bitcoin payments can be made without any personal information tied to the transaction. This offers strong protection against identity theft. Bitcoin users can also protect their money with data backups and encryption.
- Transparent and neutral: All information concerning the Bitcoin money supply itself is readily available on the blockchain ledger, for anybody to verify and use in real-time. No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secured. This allows the core of Bitcoin to be trusted for being completely neutral, transparent and predictable.
What are the disadvantages of Bitcoin?
- Degree of acceptance: A lot of people are still unaware of Bitcoin. Every day, more businesses accept bitcoins, but the list remains small and still needs to grow in order to benefit from the network’s effects.
- Volatility: The total value of bitcoins in circulation and the number of businesses using Bitcoin are still very small, compared to their potential. Therefore, relatively small events, trades or business activities can significantly affect the price. In theory, this volatility will decrease as Bitcoin markets and the technology mature. Never before has the world seen a digital medium of exchange which is digital and secure, so it is both difficult and exciting to imagine how it will play out.
- Ongoing development: Bitcoin software is still in beta, with many incomplete features in active development. New tools, properties and services are being developed to make Bitcoin more secure and accessible to the masses. Some of these are still not ready for everyone. In general, Bitcoin is still in the process of maturing.
Is Bitcoin secure?
Bitcoin technology - the protocol controlling the blockchain and the cryptography - has a strong security track record, and the Bitcoin network is probably the biggest distributed computing project in the world. Bitcoin's most common vulnerability is in user error. Bitcoin wallet files that store the necessary private keys can be accidentally deleted, lost or stolen. The latter is pretty similar to having the credentials of your e-banking account stolen. Essentially, bitcoin is like money on your bank account or physical cash in your purse. However described, bitcoins are stored in digital form and thus require a reasonable level of caution as well as necessary care when dealing with them. Luckily, users can employ sound security practices to protect their money or use service providers that offer good levels of security and insurance against theft or loss.